The press recently reported on a series of investigations
undertaken by the New York Attorney General's Office to
scrutinize private equity firms' use of "management fee
waivers." Starting in July, Attorney General Eric Schneiderman
began issuing subpoenas to some of the largest private equity firms
with operations in New York in an effort to obtain documents
describing the management fee waiver practices utilized by each
firm.
What Are the Management Fee Waiver Strategy and its Potential
Tax Benefits?
A management fee waiver or conversion is a strategy whereby the
general partner or management company of a private equity fund
"waives" the management fee (often up to 2 percent of
assets or committed capital per annum), which would typically be
paid quarterly and treated as ordinary income for tax purposes, in
exchange for an increased "carried interest," which often
qualifies for long-term capital gain treatment. In many cases, the
receipt of an additional carried
